GOP Divided Over Monetary Policy As Fed Chief Pick Looms

By Kate Davidson Features Dow Jones Newswires

After criticizing the Federal Reserve for the past eight years, Republicans finally have a chance to change the course of the central bank when President Donald Trump nominates someone to take the helm in early 2018. But they are divided over which direction monetary policy should take.

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GOP efforts to subject the Fed to more scrutiny and limit its discretion gained traction in the wake of the financial crisis, especially in the House, and Republicans hammered Fed officials over why they continued to keep interest rates so low, saying the policy hurt savers and distorted markets. Now, with the prospect of a Republican-led tax cut and faster economic growth on the horizon, some in the party are wary of a choice that could disrupt markets or cut off growth by lifting rates higher to keep inflation under control.

"I'm not sure there's a clear way that Republicans think about the Fed," said Tony Fratto, who worked on economic issues in the George W. Bush administration. "When you ask, 'What would you want from a new Fed chair, ' I think it's a little bit all over the place."

The split is reflected in the slate of candidates President Donald Trump has homed in on as he nears a decision.

On one side are two vocal Fed critics, Stanford University economist John Taylor and former Fed governor Kevin Warsh who have chastised the central bank for its easy-money policies and called for changes to the way officials make and communicate decisions -- views that align closely with the Fed's conservative GOP critics.

On the other side, two Fed policy makers, Chairwoman Janet Yellen and Governor Jerome Powell, a Republican, have favored a gradual approach to reversing the Fed's crisis-era stimulus programs -- policies that most Democrats and moderate Republicans have supported.

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The president is planning to meet with Ms. Yellen to discuss the job on Thursday.

Also in the mix is Gary Cohn, Mr. Trump's top economic adviser, who has provided few public clues about where he stands on monetary policy.

Asked whether he had a preferred candidate among the five finalists, Mr. Trump said at a news conference Tuesday, "Honestly, I like them all, I do. I have a great respect for all of them."

The president is expected to announce a final decision before his trip to Asia, which begins Nov. 3.

Meanwhile, he'll receive advice on the choice from two different Republican camps.

Treasury Secretary Steven Mnuchin is strongly backing Mr. Powell, according to several people familiar with the matter, who noted the two have developed a good working relationship over the past seven months working closely together on financial regulation issues. Mr. Powell is also close to Randal Quarles, the Trump nominee who recently took office as Fed vice chairman for supervision, and who worked with Mr. Powell during the George H.W. Bush administration.

Mr. Powell "represents this technical vision of what a monetary policy should be no matter who's in power," said Peter Conti-Brown, a financial historian and assistant professor at the University of Pennsylvania's Wharton School. "Although he's been following that consensus rather than leading it, there's little difference between Jay Powell and Janet Yellen."

The Treasury Department declined to comment on the matter

Conservative Fed critics, especially in the House, have an important White House ally in Vice President Mike Pence.

Mr. Pence, who sat in on Mr. Taylor's interview with the president last week, sponsored a bill when he was in Congress that would have eliminated the Fed's so-called dual mandate, forcing it to focus only on achieving low, stable inflation rather than on also fostering maximum employment.

Mr. Pence is also close to Rep. Jeb Hensarling (R., Texas), the chairman of the House Financial Services Committee, who has invited Mr. Taylor to testify on numerous occasions and pushed legislation to require the Fed to adopt a mathematical formula for guiding interest rates -- something akin to the Stanford economist's Taylor rule.

A spokeswoman for Mr. Pence declined to comment on whether he has a preferred candidate.

Mr. Warsh, who served as a Fed governor from 2006 to 2011 and worked as an adviser to President George W. Bush, has been favored by mainstream Republicans who want to see changes atop the Fed, but who see him as a shrewd political operator who might not raise rates too quickly if Mr. Trump's economic policies spur faster growth. But Mr. Warsh's critiques of the Fed, and his apparent campaigning for the job, have irked several current and former top Fed officials.

While Ms. Yellen has argued against significant changes to postcrisis financial rules, the other candidates appear more sympathetic to the view -- shared by congressional Republicans and the administration -- that the regulations should be eased, said Michael Feroli, chief U.S. economist for JP Morgan Chase.

"I think you see less unity between the administration and various members of Congress in terms of what the priority should be on monetary policy," he said.

For example, Mr. Trump has emphasized his preference to low interest rates. Mr. Taylor's policy rule, if implemented by the Fed today, would call for interest rates near 3.5%, Mr. Feroli said. That is well above the Fed's benchmark short-term rate's current range between 1% and 1.25%.

Mr. Trump has praised Ms. Yellen and said she is under consideration for another four-year term.

For nearly four decades, new presidents have nominated the sitting Fed chief for another term, even if that person was appointed by a president of the other party. But the White House is under pressure not to pass up what might be Mr. Trump's only opportunity to install a Republican in one of the most important posts in the government.

Though no one in Mr. Trump's orbit is pushing for Ms. Yellen, the president last month sought input from across the aisle.

During a Sept. 13 dinner at the White House, Mr. Trump asked Senate Democratic Leader Chuck Schumer his opinion of Ms. Yellen, according to two people familiar with the matter. Mr. Schumer -- who has met with the Fed chief several times and bonded over their shared Brooklyn roots -- told the president he thought Ms. Yellen had done a good job and deserved to be renominated, the people said.

The White House had no comment on Mr. Trump's conversation with Mr. Schumer.

She would likely win widespread support from Senate Democrats, who have defended the institution against Republican attempts to rein it in despite some concerns about how the Fed oversees Wall Street.

She may also be the most likely to advance Mr. Trump's interest in keeping rates low and the economy on an even keel, said Mr. Conti-Brown.

"By any objective standard, she's been an extremely successful Fed chair, " he said. "If the Trump administration asked me who is the person in our best interest to appoint, I would say it's Janet Yellen."

Write to Kate Davidson at kate.davidson@wsj.com

(END) Dow Jones Newswires

October 19, 2017 05:14 ET (09:14 GMT)